Credit card debt -- it's both the oil that lubricates the consumption-based U.S. economy, and the bane of existence for tens of millions of American households.
Based on statistics provided by ValuePenguin in November 2015, U.S. consumer debt totaled a whopping $3.4 trillion. Of this amount, outstanding revolving debt equated to $929 billion. This figure has grown pretty steadily since 2010, when outstanding revolving debt stood at $841 billion.
Why Americans love their credit cards
Within the United States, three out of eight households are carrying some form of credit card debt, with the mean credit card debt of those households equaling $5,700. As you might have surmised, the average amount of credit card debt tends to rise in accordance with household net worth, with one notable exception: the highest average credit card debt in America goes to households with zero or negative net worth.
Why are American consumers so in love with their credit cards? To begin with, plastic is incredibly convenient. There's no monetary value assigned to swiping a piece of plastic as there would be with handing over cash to a cashier. Thus, it's a lot easier, psychologically, for the consumer to spend, spend, spend with a credit card.
Credit cards these days also dangle rewards and lures to draw in customers. The idea of gaining 12 months without interest payments just by opening an account, or the ability to obtain airline miles or cash back for each purchase you make, is a temptation too great for a consumption-hungry society to ignore.
Lastly, Americans need to establish some degree of credit history should they ever want a loan to buy a car or a home. Furthermore, credit scores and reports can affect your ability to land a job or rent an apartment. Thus, consumers are incentivized early to get a credit card or three and prove to creditors that they're trustworthy.
But plastic has a dangerous side as well. Mismanagement of your credit card debt can lead to a damaged credit score, or potentially even bankruptcy if things get bad enough.
Five states with the highest average credit card debt
One of the most interesting statistics noted by ValuePenguin, using data from credit reporting agency TransUnion, is that residents of certain states have a propensity to carry more credit card debt than others. Despite mean household debt (of debt-carrying households) of $5,700 across the U.S., residents in the following five states carry credit card debt that ranges between 12% and 35% above the national average.
- Alaska: $7,706 average credit card debt per household
- Virginia: $6,520
- Connecticut: $6,494
- Maryland: $6,448
- New York: $6,390
Why do households in Alaska carry substantially higher levels of credit card debt relative to other states? It appears that a higher cost of living and geographic isolation are the defining factors. On first look, one would assume that Alaska's largest cities, such as Anchorage, have lower costs of living than those of, say, San Francisco and New York City. In fact, Alaska's isolation from the mainland U.S. causes goods and services to cost more across the board (primarily because of costs tied to transportation). From energy and healthcare to groceries and rent, Alaskans simply pay more than the U.S. national average, and that added cost seems to make its way to Alaskans' credit cards.
Median household income may also help explain why the aforementioned five states boast the highest credit card debt levels. Maryland, Connecticut, Virginia, and Alaska rank first, third, fourth, and seventh, respectively, in terms of three-year median household income according to the latest data from the U.S. Census Bureau. Since higher income households are often predisposed to higher spending levels, it's not surprising to see residents in these states carrying more credit card debt than the national average.
New York is a bit of an anomaly, and I have to admit that I'm not entirely sure why its residents collectively carry so much credit card debt relative to the national average. However, I'd venture a guess that even though the state's median income is in the middle of the pack based on U.S. Census data, debt-carrying households in and around New York City are more than making up the difference and driving up median household credit card debt. Kiplinger listed the Big Apple as the most expensive U.S. city to live in two years ago.
Four ways to keep your credit card debt under control
For residents in some states, such as Maryland, high credit card debt may not be an issue. For instance, a household with a high net worth and substantial annual income may be able to comfortably afford $6,448 in average credit card debt.
The worry occurs when you get rising debt levels in lower-income or negative equity households. It's for these households that I offer up four steps to cutting your credit card debt.
First, I'd encourage all households to create and stick to a monthly budget. Creating a budget gives you a keen understanding of your cash flow. Without a budget you may have a decent bead on your income, but it's unlikely you'll have a good understanding of where your money is being spent. With money apportioned to specific areas each month, you can save extra money, which can be put toward your credit card debt.
Secondly, have a plan in mind for how you want to tackle your debt. Although your credit score could be dinged for getting too close to your credit limit on one or more of your credit cards (credit agencies typically don't view consumers who are have spent up to 30% of their credit limits or more kindly), transferring your balances to a 0%-interest or low-interest card and focusing all your efforts on paying down that card could be a smart plan. The idea here is to have a written plan that you can follow each and every month.
Third, talk to your creditors, especially if you're having trouble making ends meet. Your creditors would much rather work out a payment plan with you than send your unpaid debt to a collection agency where it'll recover far less than what you owe. Further, it never hurts to ask your creditor to consider lowering your interest rate. If you have a good payment history, there may be good reason for your creditor to consider lowering your interest rate. Lowering your APR can save you a lot of money over the long run and allow you to pay off your credit card at an even quicker pace.
Finally, consider using cash instead of plastic. Despite cash being less convenient and offering no loyalty rewards, paying for goods and services with cash can help remind you of the value of a dollar. Spending physical cash from your wallet allows you to witness the drain on your wealth firsthand, and it could make you think twice about discretionary purchases. Plus, retailers may offer discounts on cash purchases as opposed to credit.
If used wisely, credit cards can be a help and not a hindrance. Make sure you're taking the appropriate steps today to ensure that you're managing your credit card debt prudently.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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